Labour says it's being "prudent" by reining in its spending plans, but it may come to regret not giving the economy more of a boost from the public purse

What might have been? It's a question we all ask ourselves at some stage in life, but it's especially pertinent now that Labour has announced it's reining in its strategy–some may say instincts–to make significant increases to social spending in the lead up to the election.

Helen Clark has revealed that Labour had a few more policy announcements planned for this campaign, but the party has decided to put them on ice due to concerns about the global financial crisis. The party was lined up to extend paid parental leave, increase the minimum wage, and introduce a mysteriously unspecified "primary healthcare initiative".

"We have judged it not prudent at this present time to make those sort of commitments," Helen Clark said this week. Instead, the party will try to focus attention on its promised but vague December economic stimulus package and the moving forward of some planned infrastructure spending on roads, schools and the like. (Although, over at No Right Turn, Idiot/Savant points out that this is a sign of where Labour policy is likely to go later in a fourth term, should the economy recover over the next 12-18 months).

The world's financial crisis has become the puppet-master in this campaign, and the parties are darting this way and that at each tug of its wrist. Both major parties are at risk of getting themselves tied in knots as they argue for the spending and tax cuts already announced and the need for fiscal restraint at the same time.

My first instinct was that the financial crisis would benefit Labour. In the days since I wrote this piece about how voters could make a political flight to safety, Helen Clark has certainly been pushing the "don't change horses mid-stream" message for all she's worth, even hollering it at Mark Sainsbury at the end of the first leaders' debate.

It was interesting to note, however, the latest TVNZ/Colmar Brunton poll on who's to blame for New Zealand economic strife. Just 14 percent say it's the government's fault, which at first blush is reassuring. But then the poll goes on to say that nearly 50 percent of voters believe both international and domestic forces are responsible. If that's true, voters might want to punish Labour for the economic pressure they're feeling.

It's understandable that people lash out and say "a curse on all your houses", but really, quite what the New Zealand government was supposed to do about the US sub-prime market and the endless stream of "creative" new lending products being churned out by over-leveraged US financiers, I can't imagine.

It's typical of New Zealand politics down the decades. We don't give governments the mechanisms required to really run the economy; indeed, the government has become a much smaller player in its own economy since even the 70s, let alone the 50s and the 30s. Remember David Lange saying the really powerful person in New Zealand isn't the Prime Minister, it's the Reserve Bank Governor? Yet come the down turn and we blame the government.

That would be unfair criticism of any government in power, but it's particularly ill-informed when levelled at the economic management of Michael Cullen. The parties of the right have attacked Cullen for failing to prepare New Zealand better for this downturn, and we could all pick out examples of what we see as his policy failings. (I'd go for a lack of investment in innovation and universities for a start). But an independent observer would have to give him a significant amount of credit for having our national debt and unemployment rate lower than other western nations, leaving us in a better position than most to ride out this financial storm. In short, our worst in the next year or two is likely to be better than Britain's or America's worst, and we have Cullen in large part to thank for that.

The Finance Minister has taken a very Keynsian approach to the economy: Save in the good times, spend in the bad. John Maynard Keynes was a fan of government intervention in recessions, arguing that by cutting interest rates and taxes and boosting spending on infrastructure and other government initiatives, the public sector could help keep the economy moving in those times when the private sector hides under the bed sobbing and rocking back and forth.

Which is why it's nonsensical for commentators such as David Farrar over at Kiwiblog to try to scare people into thinking that Labour has a secret tax increase policy. It would go against the Keynes-inspired Cullen doctrine. (It's also ridiculous to pretend that National has been following the same economic logic for the past few years. Its policy was to cut taxes years ago; ie spend in the good times).

It's interesting to note that all the political parties in this country, apart from Act, are now taking a Keynsian approach to this crisis. Even National has lately come round to this kind of thinking, advocating increased infrastructure spending and a quick interest rate cuts. Its talk of taking a "razor gang" to the public sector is badly timed, but you can't have everything. Under John Key they seem to have come a long way back towards more centrist economic thinking.

It's a fascinating indication that the free-market philosophies that held sway in this country as recently as the late 1990s, have been well and truly dumped in the bin. It's bad news for Act, which has dredged up the symbol of that discredited line of thinking, Sir Roger Douglas, as its trump card this election. Sadly for Act, it's playing a club when the rest of the table is calling hearts.

All of which makes me question whether Labour has been wise to rein in its spending plans so abruptly and why it isn't giving some more detailed outline of its December package. The minimum wage rise, for example, would be a great way to get some cash back into the economy. A benefit increase could be even better. Those with the least are more likely to spend, and spending is exactly what the economy could be crying out for in the first couple of quarters next year.

Politically, it's the perfect time for parties of the left to get widespread support for such pet projects. Business, which would normally have a tantrum over a minimum wage or benefit increase, is hardly going to oppose any measure that keeps the cash registers ringing in the new year. Economically, it's public money that will keep the economy ticking over in 2009.

If Labour wants to inspire confidence in voters, it shouldn't be leaving us wondering what it's planning for December. Of course Clark and Cullen can't give details now. The package needs to respond to the needs of the times, and the times are changing every week at the moment. But they could and should be sending much clearer signals to voters and to the market about their commitment to public spending.

Paul Krugman in the New York Times has spoken about the good that government spending can do in a recession. Apart from infrastructure, he also mentioned increasing benefits as an economy stimulating option. According to the Nobel-prize winning economist, "The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit".

I wonder whether Labour's new found prudence is really as wise as it seems. You could say that what might have been, might have been better than what is.

Comments (4)

If Labour wants to inspire confidence in voters, it shouldn't be leaving us wondering what it's planning for December. Of course Clark and Cullen can't give details now. The package needs to respond to the needs of the times, and the times are changing every week at the moment. But they could and should be sending much clearer signals to voters and to the market about their commitment to public spending.

Well, Tim, I'd actually like all parties to stop behaving like conjurers at a nudist camp pulling shiny objects out of various mysterious nooks and crannies. Spending promises are all very nice, but I think voters are perfectly entitled to some straight answers to straight questions about where all this neo-Kenysian stimulus is coming from. Paul Krugman mightn't care, but then again neither did George W. Bush and where did that particular rabbit end up sinking its teeth?

To be fair, most of the parties are talking about borrowing, about taking from the Foreign Affairs promise, about spending the budget Labour has not spent thus far, about spending the KiwiSaver budget... Take your pick. But the Bush comparison doesn't pan out. We're not talking about a $10 trillion deficit here, and well done to Labour for that. New Zealand doesn't have a multi-billion dollar bill to pay each month to secure/maintain its invasion in (depending on your politics) another country.

Spending worked for FDR, it worked for Labour in 1935, it worked for Europe after WWII... it makes sense

Spending worked for FDR, it worked for Labour in 1935, it worked for Europe after WWII... it makes sense.

Now, wait a moment, Tim -- are you seriously arguing we're facing 1935 all over again (which is a comparison Cullen is highly reluctant to make, I think it's fair comment to say) let alone akin to a continent crippled by war?

Certainly not saying that we're facing the 1930s again. Check out Eleanor's post on that subject. I quite agree with it. But the economic principles are much the same in 'bad times', no matter the degree of the trouble.